I recently had a wonderful chat with Harry Stebbings on his awesome podcast The Twenty Minute VC. There’s a very good reason it’s become the gold standard of podcasts about the VC and startup world: it’s Harry of course! He brings a healthy obsession for anything related to venture and entrepreneurs; an energy and helpfulness in every interaction; and deep domain experience gained from thousands of conversations with some of the world’s top investors and founders. I’m personally grateful to him because I’ve learned so much over the years from listening to his show.

The episode we did was very natural and conversational – it felt like two people grabbing a coffee or beer (or mojito in Harry’s case) and just chatting about what he calls “the wonderful world of venture.” We covered a wide range of topics but probably my favorite was building relationships with founders.

At Firebrand we like to say we invest in trusted relationships with exceptional founders. This is much more than a tagline for us – it’s describes how we approach every touchpoint with the entrepreneurs we invest in. We recently looked at all 25 companies we’ve invested in so far and determined how many we’d known and communicated with for at least 4 months before investing: it was 18 out of the 25. (We’d known many of those 18 for much longer than 4 months.) We don’t always have the luxury of knowing founders for months before investing – in those cases we squeeze in as much interaction as possible into the ~4 weeks it usually takes us to go through our evaluation process.

Of course trust is a two-way street so it’s super important for the founders to get to know us too. That’s where our transparency comes in handy. We’re very much “what you see is what you get” kind of people and we value authenticity and being direct. Once a solid foundation of trust is built, founders know we’re going to be the same people whether we’re hearing news that’s good, bad or ugly. We actually welcome the bad and ugly because 1) We know there will always be tough times and 2) That’s when we get to roll up our sleeves and solve problems alongside the founders, which is by far the most important part of our job. And after we’ve done that a few times they know they can keep coming back to us for help which is what we live for!

If you listen to the podcast I’d love to know your thoughts on our approach to building trust or anything else we discussed.

It’s been exactly two years since I took the leap and started raising the first Firebrand Ventures fund on August 1, 2016. Recently my friend Elizabeth Yin, GP at Hustle Fund, wrote a great blog post called 11 Things I’ve learned from running a micro VC in the last year. It’s wonderfully transparent and debunks a few of the myths about starting your own small fund. After reading Elizabeth’s post I was inspired to take a crack at documenting some of my lessons from running Firebrand the past two years.

Like other emerging fund managers, I’ve greatly benefitted from the trend of increasing transparency in VC. Whether it’s blog posts by Brad Feld, Mark Suster, or Fred Wilson (who’s written a blog post every day for almost fifteen years!) or others offering up gems on awesome podcasts like The Twenty Minute VC, I’m grateful to all who share their learnings.

So I wanted to pay it forward in some small way and relay some of my experiences. In particular I wanted to share some details from my fundraising process because there doesn’t seem to be a lot of info about that.

I have way too many learnings for one blog post but hopefully some of these will be helpful.

1) Before You Raise: Get Lots of Feedback

Talk to as many VCs as you can. I found it especially helpful to chat with VCs who had an active role in raising their funds. Different VCs will have different advice on the same questions so compile everything and then filter it when you’re done. Make it easy for them to help you by asking specific questions. What should you get feedback on?

Start with the Overall Approach …
• What kind of fund do you want to be – i.e. pre-seed, seed, or both? Where do you see the compelling opportunities? Do you want to be a sole GP or have one of more partners? What’s your investment thesis?

… Then Drill Down
• Your investment strategy: The specific sectors, stage, geography, etc. you’ll focus on
• Your investment criteria: Key factors you’ll look for in a startup and its founders
• Your economic model: Targets for valuation range and round sizes you’ll invest in; your typical check size and equity stake; target fund size (see below)
• Portfolio Construction: Portfolio size + equity stakes + follow on allocations, etc.
• Check out other VC fund websites – most will list their approach and criteria. You can also learn a ton by listening to experienced VCs on podcasts or watching them give interviews on YouTube.

Your LP Deck and Pitch
• What is your compelling story? How will you differentiate from the many other seed funds out there? What makes you uniquely qualified to generate superior (3x+) returns? How will you help your companies succeed?

• In the beginning your pitch and deck may be awful, as I’m sure mine was, but it’ll keep improving as you iterate. For those VCs close to you, ask for feedback on it. Try boiling your main value props down to 2-3 short bullet points – those key advantages your fund brings to the table. Once I did that, the pitch resonated much better with LPs.

• Special thanks to my mentors David Cohen and Brad Feld. They gave their time and helped me think through nearly every aspect of the fund before I launched it, and continue to provide sage advice. I’ll always be grateful for that.

2) Taking the Leap: The Raise

Set Your MVFS (Minimum Viable Fund Size)
Okay I totally just made up MVFS, but one of the great pieces of advice I got early on was to figure out the smallest fund size that will make the economic model work and use that as your minimum target. If you raise more, great! But be prepared to only raise your minimum. For Firebrand that was $7M.

On 8/1/16 I started fundraising with a $7M target, a crappy deck, and zero contacts in my local high net worth community. Zero. I started with one intro to a well connected person in the community, and fortunately he became a great advocate for me and Firebrand. That didn’t make it easy but it was a start.

Multiple Closes
From the start I decided to raise the fund by doing multiple closes, which turned out to be about one close every three months. Raise in chunks, invest it out in chunks, rinse and repeat. I spent about 50% of my time fundraising and the other 50% on deal flow, diligence, helping our founders, organizing fund events, and admin. It was a crazy period but the strategy had several benefits:

Making investments early on showed we were for real
That first close was modest but enough to make our first three investments: FitBark, Sickweather and Dwolla, where we co-invested alongside USV and Foundry Group. People could see the fund was for real and actively investing.

We could get our investment cadence started
We make about 10 investments per year so it was important to get that going and stay on that schedule. Multiple closes made that possible.

LPs could track our companies’ progress
As we repeated that pattern of doing closes and making investments, potential LPs could see what kinds of companies we were investing in and how they performed in the short term. New LPs committed and several existing LPs increased their stakes over time because they liked how our companies were progressing. The longer I fundraised, the more progress our companies made, the more attractive it became for LPs. By the time we did a final close of the fund we had already invested in 13 companies.

Be Prepared for the Fundraising Rollercoaster
Some VCs love fundraising. I don’t. I do love meeting new people, and that was the most rewarding part of fundraising for me. I learned that managing my emotions was key during the fundraising rollercoaster. I had great runs where for 3-4 weeks I only heard “yes”. I also had nerve-wracking plateaus where I raised little or nothing for 4-6 weeks. This continued for the entire fundraise.

Even as my pitch improved and the fund size grew it never got faster or easier. It was still a matter of building relationships and trust, one LP at a time. I was making solid progress raising from local LPs, so after our second close I decided to stay focused on my community. Every GP has a different situation – for me, the local focus turned out to be the right call. It helped with referrals and organically created a nice civic narrative for the fund.

As much as I enjoyed getting to know amazing people I otherwise wouldn’t have met, the exhaustion started creeping in after 6 months of fundraising and two closes of the fund. I took a short vacation to recharge and then went back at it. After 6 more months I could’ve closed the fund at a decent number – I think we had about $10M in commitments at the one year mark. But it was early September and I believed there was more local demand and folks just needed to resurface after the summer. I did another mental reset and decided to extend the raise for another six months. I’m glad I did!

Our initial $7M target grew to almost $18M when I closed the fund last March after 18 months of fundraising. Yep I was a bit worn out – I rarely get sick and I got a cold for a month after the final close. Overall I felt good about raising $17.7M for the first fund, especially since 99.5% was from local LPs. Fundraising was finally done. Right?

3) Fundraising is Never Really Done

My good friend Ari Newman wrote a great blog post a couple years ago called A.B.F. – Always Be Fundraising. It was meant for founders but it certainly applies to GPs too. I recall after about 7 months of fundraising I had reached our initial target of $7M so I asked one of my mentors, “Should I stop?” I really just wanted him to say yes because I was tired of raising and wanted to focus all my time on new investments and helping our companies. He said something to the effect of “Why stop? You’ll always be fundraising anyway, might as well keep going.” I knew he was right and that advice served Firebrand very well.

Fundraising is all about building relationships and that shouldn’t stop just because your raise is finished. I’ve continued to keep the dialogue going with those who expressed interest but didn’t invest. Trust is the most important element in the investor-founder relationship and that is earned over time and multiple touchpoints. Always be fundraising.

4) The Team is Everything

Since I don’t have any partners for Fund I, it was especially important to surround myself with several experienced advisors. Our advisors provide invaluable feedback on every company we’re seriously considering, as well as input on plenty of other questions big and small.

After I closed the fund I hired a fund Associate, Maranda Manning. She and I had worked together at Techstars so I already knew she was terrific. She hit the ground running and has been immensely helpful for deal flow management, diligence, and many other areas.
Being a sole GP can be awesome; it can also be lonely and stressful. Managing a small fund isn’t hugely profitable or glamorous and can feel like a total grind sometimes. Fundraising for 18 months in the Midwest really tested me but when I look back I’m glad it was hard. Call me old fashioned but I believe raising millions of dollars shouldn’t be easy. During the one evening I celebrated the final close, it felt like a great accomplishment. Then it was back to work!

It’s early days for Firebrand. Like any VC, I won’t know how I’m really doing for another 5-10 years. There will be many more years of learnings, wins and losses, ups and downs. It’s simultaneously the most challenging and rewarding job I’ve had. I’m incredibly grateful for my mentors and advisors as well as the many other VCs out there who continue to share their lessons. Above all, I just love working with amazing founders – that’s what gets my adrenaline flowing. After two years, I couldn’t imagine doing anything else!

I make a point to avoid using the word “pass” when telling founders their startup isn’t a fit for Firebrand. Maybe it’s because I was a founder – I can’t help but feel empathy for them. It’s a key part of our approach. And that word just feels cold and impersonal to me. I don’t even like using it when talking with other investors.

I meet with so many entrepreneurs who pour their blood, sweat and tears into their startup. Though many loathe fundraising they put in the work and try to prepare for rejection while hoping for a Yes. These days there are more investors than ever but the balance of power is still firmly in the hands of VCs. This means for every 100 startups that pitch an investor, they may invest in one. That’s a lot of of No’s.

I totally get that rejection is a big part of fundraising and a thick skin makes it easier, but that doesn’t mean it’s easy for founders to hear “no” over and over again. Especially first-time founders. From some investor responses it can be hard to distinguish “not a fit for us” from “your startup sucks and therefore so do you!”

A few years ago a founder I know showed me a response from a VC he had pitched via email. The founder had gone through all the right steps – researched the investor to ensure he invested in his space and stage, got a warm intro, emailed a concise description of what they did and why he thought it was a fit, and asked if he’d like to meet for coffee or chat on the phone.  The investor’s email reply had one word: Pass.

It’s an extreme example but that stuck in my head and when I started Firebrand I swore I’d never be that kind of VC. I never forget these are human beings I’m dealing with, not deal flow metrics for my LPs. Don’t get me wrong: I’m very clear when we choose not to invest in a startup and strive to give the answer as quickly as possible. And I always provide the reasons when it’s not a fit.

I’m sure plenty of founders and VCs don’t have a problem with the word “pass”. And I certainly don’t judge other investors for using it. My personal experience with it just created a negative association. Founders are the whole reason I have a job and this business process of fundraising happens to be a very personal one. I tell lots of founders their startup isn’t a fit for us, and why, but I don’t use the word “pass”.

I’d love to hear from the founders out there: How does it hit you when an investor says they’re going to “pass” on your startup?

 

 

Words matter. Which is why I mentally cringe when some VCs say they want their founders to be arrogant. Let’s look at two definitions of arrogant:

Merriam-Webster: exaggerating or disposed to exaggerate one’s own worth or importance often by an overbearing manner; showing an offensive attitude of superiority.

Dictionary.com: making claims or pretensions to superior importance or rights; a sense of superiority, self-importance, or entitlement.

Exaggerating. Overbearing. Offensive. Self-important. Entitled. Some VCs probably saw a few of these founders generate huge returns and concluded that’s the CEO blueprint for success. 

Except it’s not.

Arrogance can look like strength and confidence but it’s typically the opposite: a psychological defense mechanism that projects a facade of superiority to hide some serious insecurities. Loud, arrogant people are often the most insecure and fearful people in the room. They are terrified others will think they’re dumb and incompetent. So they overcompensate. The more fame and fortune they attract, the more fearful they become, the more superior and entitled they act. Often with disastrous results. 

We’ve all seen it: one well-funded, arrogant CEO after another, doing offensive and illegal things, falling from grace and sometimes taking their companies with them. 

As a group, VCs themselves aren’t exactly poster children for humility. Worse, arrogance has no doubt played a role in the disgusting culture of sexism and harassment in Silicon Valley. The initial denials and subsequent pseudo-apologies of some offenders were almost too arrogant to believe. 

Arrogance is also related to the shameful lack of diversity among founders that get funded. VCs need to look beyond the arrogant white dudes to fund more women and people of color who don’t fit their preconceived founder image. This is starting to change but there’s much work to be done, by all of us.

Some of the smartest, most confident and successful people I know are actually humble. But don’t confuse humble with meek. They’re outspoken at the right times, stubborn even. But they’re not the loudest – they listen more than talk. They realize there’s a ton they don’t know and they’re honest about it. They operate from a place of relentless learning. They’re smart enough to know it’s not about proving they’re the smartest in the room. 

We shouldn’t be encouraging arrogance in anyone, especially our future business leaders. Let’s be vocal about supporting entrepreneurs who are coachable. Honest. Audacious. Respectful. Persistent. Emotionally intelligent. 

Because those are the qualities of great leaders and human beings. And because words matter. 

I recently got a question from an aspiring entrepreneur trying to figure out the right steps for starting his tech company. He seemed very deliberate about taking the correct approach. He’d been thinking about his idea for two years, staying updated on his market and getting feedback from various sources including two top accelerators.

He said he was moving towards building their MVP but first wanted to know what’s most important to investors about a go-to-market strategy. For example, should he target a niche market first or go after a larger market right away?

Here’s my response to him, with some minor changes from my original text:

• Don’t build your business for investors

• Build your business to enable maximum growth in the next 1, 5, 10 years

• You said you’ve had the idea for two years and watched the market evolve. Markets will continue to evolve. Have a thesis for what direction your market will go but START NOW. If you really want to build a startup you need to just start BUILDING. Perform small experiments along the way, make mistakes, learn from them, and adjust accordingly.

• I’m not necessarily telling you to quit your job and just go for it with no funding or market proof. Build it in your spare time if you need to. Plenty of successful companies start that way.

• Starting out in a niche market is fine as long as you have a plan to dominate that niche and then expand into larger markets or additional segments

• You’ve already gotten feedback from two legit orgs I know – take what feedback makes sense and make it part of your initial strategy

• A startup isn’t a linear line from beginning to success. It’s a messed up, twisty, jumbled path that’s filled with mostly frustrating, humbling experiences interspersed with a win or two if you’re both good and lucky.

• Make sure you’re solving a massive pain point. Not a mild headache, a huge migraine. Get some feedback from potential customers to validate this. If the feedback doesn’t validate it, maybe you need to change your idea.

• Strive to be 10x better than any other solution to the migraine you’re solving

• Feedback is critical but investors shouldn’t determine your go to market strategy. Think about investors when you’re putting your investor materials together (pitch deck and exec summary). Have a super compelling story, exceptional team, and hopefully some early revenue traction or at least an awesome MVP. These days it can be hard to raise capital for ideas unless you have a stellar track record.

The main point is: Just Build It! Yes you need to research your market, competition, and customers. Do it quickly. And once that feedback validates your thesis, build it! Then get feedback on what you’ve built, iterate and keep building. That’s what entrepreneurs do!

You often hear about the importance of founders being “coachable”, but what does that mean? Does it mean they should follow advice from anyone who seems more knowledgable? Bryce Roberts blogged about being coachable not malleable. A CEO needs to view feedback like any data that’s relevant to their startup: it should be quickly analyzed, filtered, and acted upon only if warranted. CEOs please always remember: it’s your business. If you try to follow everyone’s advice, your business won’t exist very long. At the same time, you should be open to quality advice. So what’s the right kind of “coachable”?

1) First: Be Open to Direct Feedback

Sounds easy, right? Turns out it can be difficult to hear someone call your baby ugly. The trick is to listen, ask relevant follow up questions, and avoid debating. And listen some more. If you’ve met with 25 potential mentors and dismissed every piece of feedback, you probably weren’t open to it in the first place. Keep an open mind and don’t take it personally.

2) Filter the Feedback

Expect conflicting advice from different mentors. At Techstars we call this “mentor whiplash”. You shouldn’t try to follow all of the advice – that would be a mess – but nor should you dismiss it all. Filter it, and hopefully what’s left is actionable advice that sets your startup on the right path. Sometimes you’ll have data and objective advisors to guide you; other times you’ll have to trust your gut. Analyze it, take control and set a definitive direction.

3) Nurture a Continuous Feedback Loop

Great mentors are magic, and once you engage them the best thing to do is keep them engaged. The mentor-mentee relationship is like any other: it needs to be nurtured and it’s up to the mentee to do that. Meet regularly and continue to ask for feedback. I love it when I talk to CEOs who went through Techstars five years ago and still meet with their lead mentors every month. Again, it doesn’t mean you should act on every bit of advice – they’re all data points – just listen and be judicious.

Being coachable isn’t enough – it’s important to be the right kind of coachable. You can be strong and confident while soliciting advice, it just takes practice. Your startup will thank you.